More Bearish News For Homebuilders – The Death Cross

The Mortgage Bankers Association mortgage purchase applications index dropped again last week. It fell 3% week to week (seasonally adjusted), it fell 14% unadjusted and it plunged 12% year over year. This has been the pattern almost every week this year.

This is particularly bad news for the new homebuilder companies because 93% of all new homebuyers use a mortgage to make their purchase. If purchase applications are not being filed, new homes are not being sold. There’s no room for spin in that. The numbers are the numbers. In my latest research report, the company I feature specifically had to disclose that its contract signings are dropping. Hovnanian reported just this morning that contract signings dropped 9.2% year over year. This is going to turn into a bloodbath.

My latest research report idea is my best work yet. I go into very specific areas in which this company engages in borderline accounting fraud. I have never seen another publicly available research report which delves into the misleading accounting like this. It is a unique report and it makes a compelling argument for why shorting this homebuilder stock now, with careful position management, offers the potential to make $20,000 for every 1000 shares shorted over the next 18-24 months. A 70% ROR.

The homebuilder sector is the biggest no-brainer short-sell opportunity I’ve seen since the internet bubble. No one is looking at this sector. The industry organizations continue to distort the truth and promote a “recovery” that is not happening.

The Dow Jones Home Construction Index did that nefarious “death cross” a few days ago. This is when the 50 day moving average crosses below the 200 day moving average (click on graph to enlarge):

Whenever gold does the “death cross,” it’s all you hear about on CNBC, Bloomberg and Fox. None of those entities have mentioned a peep about this for the homebuilder stocks.

All of the indicators are aligned for another leg down in price. The technicals are supported by deteriorating fundamentals.

At some point institutional investors and hedge funds are going to get ahold of my report and start selling their position in this company (mutual funds, etc) and shorting the crap out of the stock (hedge funds). You want to get in ahead of that.